Archive for the ‘Unintended consequences’ Category

Matt Levine has an illuminating post about why the recent reduction in corporate tax rates results in a reduction in some corporations’ reported profits. It seems that past losses can be saved as a “deferred tax asset,” permitting a reduction in taxes to be paid in future years. But the ratio of losses to tax reduction declines when the tax rate declines, so the deferred tax asset is reduced. Levine notes that such tax rate reduction can cause a corporation to appear less well capitalized, since it reduces assets, even tho it increases expected after-tax income.

Just another illustration of the absurdity of a corporate income tax (or perhaps of corporations in general). Of course corporations should pay taxes – based on the land (including spectrum and other natural resources) that they claim. And they should pay additional taxes reflecting the limited liability granted by the state. But the accounting concept of corporate income has little to do with this.

In order to fund community needs from a tax on land value, assessors need to estimate what that land value is. Conceptually the task need not be difficult (Ted Gwartney outlines some options here, but a more complete and still-valid examination is in this book.) Basically, you look at sales prices for actual land transactions, and make adjustments for parcels which haven’t sold recently or where land comprises only a small part of the value. But what happens if the buyer pays something additional, “off the books,” for the land?

According to Peter Katz, that seems to be what often happens. This presentation at APA last March starts off slow (and self-promotional), but moves along thru some interesting territory. Regarding the price of vacant land, he asserts that, in many desirable areas, developers have to first buy (or option) the land, then negotiate with local authorities to get permission to build. Getting that permission might require agreeing to donate money (or land) for public use, or perhaps less savory expenditures, and to the developer this is part of the cost of land. If an area of any size is subject to such constraints, all the land sales are below market prices by the amount of such costs, and all sites, whether sold or not, receive assessed land values that are lower than what developers actually pay to get a buildable site. This results in less public revenue, implying a need for other taxes, as well as a tendency to develop at lower densities than might be appropriate, when developers choose to settle for existing zoning rather than what they might be able to negotiate. Katz suggests that a formal study of this effect should be done, and nominates Lincoln Institute to make it happen.

Katz’s remedy seems to be a combination of form-based zoning codes, plus a sophisticated (and presumably accurate) fiscal impact analysis that might show denser development to actually be more “profitable” to governments. But, responding to a question about 65 minutes into (and near the end of) his talk, he acknowledges that funding government from a land value tax would be a good way to obtain the desired development pattern, and that Henry George was a great guy. His observation that Georgists tend to be wacky has been made before, and I can’t say it’s wrong.

While assisting the Public Revenue Education Council at the National Council of State Legislators convention, I couldn’t help photographing some of the federal employees in “action.” Census was there, BEA was there, but I wouldn’t want to embarrass those guys because they sometimes do some useful things. We also had

Licensed Professional and Drug Patentholder Protection Administration

Office of Travel Prevention

Department of Making Jobs and Workers Difficult to Find

Forgetting for a moment the impediment to commerce and free association, how much money are we spending on these guys? Thanks to Gannett’s Asbury Park Press (h/t Bob Matter), taxpayers can access a database of reasonably current salary information for most Federal employees. For state and local employees in Illinois, Wisconsin, Indiana, and Missouri, the Better Government Association has made similar information accessible.

Now, I’m not opposed to high salaries and liberal pensions. In fact, I think everyone should get them. The problem is not that government compensation is too high, but that private compensation is too low. Some clear graphs here (based on data collected by government employees) illustrate the problem. Nongovernmental American workers’ productivity continues to increase, but for forty years little or none of this has been reflected in wages. The best remedy involves displacing the rentiers.

*Payroller is a Chicago term for folks whose main function is to collect a government paycheck. It appears that in some places, the word has a different meaning.

David Bernstein and Noah Isackson have a pretty good article in Chicago Magazine, Gangs and Politicians in Chicago: An Unholy Alliance. Focusing mainly on Alderman but also including State and Federal legislators, they assert that “gangs” provide the money, votes, and workers that enable officials to attain and retain their office. In exchange, the governments these legislators control provide funds and favors.

Isackson and Bernstein stop short of suggesting how to repair this problem, but reading thru the article it’s clear that the main way these “gangs” prosper is thru unauthorized distribution of drugs. And one of the main favors aldermen provide is assistance in avoiding “law enforcement” efforts to arrest them. End the drug prohibition, most of the “gangs'” income will end, and candidates will no longer get “gang” money. They’ll have to rely on crooked lawyers, lobbyists, etc.

Some of the drug money, of course, has gone into real estate, with “gang” members able to get favors such as rezoning and inspection waivers. A land value tax, by constraining real estate speculation, would be of assistance here.

Suppose you are a king. And suppose you have a restless, mostly young population, high unemployment, with most people having to rent because housing and land are too expensive. Few people can get mortgages, because they involve large down payments and high interest rates. Also suppose that you have a big country, lots of land relative to population, and a huge government surplus. What to do?

You could examine why housing is so expensive, and whether there’s a way to make more land available. Maybe that’s happened in Saudi Arabia, but recent news reports give no indication. Instead, the Saudi solution is to encourage the mortgage industry and expand credit. Will that make housing cheaper? Will that make it easier for an underemployed population to get decent housing? Or will it drive up the price of land and feed what seems to be an already-building bubble? It may be that the Saudi objective is to get more of their people into debt-slavery so they’ll faithfully serve the state. I don’t know.

What really puzzles me is how mortgage interest fits into an Islamic-dominated state. Possibly this is like the “Islamic Finance” offered by some U S banks, where no interest as such is charged, but either the price is inflated to compensate for the fact that it will be paid gradually, or the “homeowner” is technically a renter until enough rent has been paid to cover the cost plus what, to others, would be interest.

Bloomberg says the King pledged more than $82 billion for housing, but does not say whether this comprises direct government grants, or is simply some amount of debt which homebuyers will contract. It also says that

Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders.

A couple of years back I attended a conference where somebody– I think it was a couple of Chicago payrollers– reported on the bus rapid transit system of Curitiba, Brazil. It’s considered by many (and I have no information to the contrary) to be a cost-effective implementation of pretty good transit service (better than we have, anyhow) at modest cost. They actually got to compare notes with the former Mayor who is considered most responsible for the design of the system. He was quoted as saying, “I’m glad we don’t have as much money as you have in Chicago, because surely we would waste it.”

What reminded me of this most recently is this release from Sen. Durbin’s office, anouncing or reannouncing the awarding of various grants. In particular:

Illinois Department of Transportation (Chicago Metro): $341,694 in TIGGER II funding to install automatic shut-down and start-up systems in an estimated 27 locomotives in the Metra fleet, which operates in the Chicago metro area. Metra estimates that by shutting down instead of idling the locomotives, the automatic systems could save an estimated 800,000 gallons of diesel fuel and reduce CO2 emissions by an estimated 80,000 tons per year.

If the information is to be believed, an investment of $341,694 “could save” 800,000 gallons of diesel per year. Now, I don’t know how reliable that estimate is, but let’s assume it’s way too high, really only 200,000 gallons will be saved. And what does Metra pay for diesel, surely not less than $2.50/gallon. On these very conservative assumptions, it would take less than 9 months’ fuel savings to pay for the devices. (And that’s not even considering the savings from not having to go thru the grant process.) And if they lacked the cash, they certainly could have borrowed it, paid extortionate interest, and still come out ahead in a year.

So why didn’t Metra do that? Are they stupid? Or corrupt? Of course I have no way to know, but I think there’s another reason. I can imagine how the decision was made:

Technical staffer: We can buy shutoff devices, pay for them with fuel savings in less than a year. May I place the order?

Manager: Would this qualify for TIGGER funds?

TS: Huh?

M: It’s a grant program. I don’t remember where the acronym comes from, but it’s federal money we can spend on things that save energy and reduce emissions. This sounds like it would qualify. The Board prefers that we use federal money instead of Metra’s “own” money.

TS: I suppose it would qualify. What do I do now?

M: Go talk to the Metra Department of Getting Grants. They’ll take care of it, you’ll just have to get them some pictures, brochures, maybe some other paper. Shouldn’t take you more than a week or two.

TS: Well, OK. Will I get a bonus for this?

I have no idea who will get a bonus, but I know who is spending more and waiting longer than necessary for a cost-effective investment.

…you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul. Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification…we reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act.

Purchasers were offered an opt-out checkbox, but apparently only 12% checked it.

Of course nobody reads the terms and conditions. (Actually, I have met one person who claims to; I didn’t ask him whether he had actually purchased anything on-line.) On more than one occasion I’ve found the link to terms and conditions didn’t work, or made no sense, have notified the vendor and usually received an updated link or a correction.

It’s true that census confidentiality is imperfect and could be used to compromise civil liberties, but I can’t imagine any way that it could be used to steal one’s identity (especially if one is cautious enough not to provide name information on the form). IRS, that’s a different matter. Anyway, Equifax has found another way to sell their protection racket. If it’s “only $4.95” for the first month, how much is it thereafter?

… at Prairie Park in Beecher, courtesy Uncle Sam. And, with the $8,000 credit Uncle also provides, you’ll take out some cash right away!

I guess the target market is folks who can’t save a few thousand dollars for a down payment. Or maybe the purpose is to keep some construction workers employed, builders solvent, and housing finance gangsters profitable. It’s a Department of Agriculture program, thus the houses are remote enough that any big increase in gasoline prices will be a problem. (This DOA site indicates that 50,000 homes will be 100% financed, funded by the American Recovery and Reinvestment Act.)

I thought that, at least for a little while, the authorities would pretend to have learned the lesson, that poor people have better uses for their energy and money than becoming highly-leveraged “homeowners.” Silly me.

The main issue Joe Stack seemed to have with IRS when he crashed his plane into their offices yesterday was the “Section 1706” provision which made it difficult for “information technology professionals” to work as independent contractors. NY Times’ David Cay Johnston reports that 70 U S Senators, including original sponsor Moynihan, had agreed it raised little or no revenue and should be repealed, but somehow it survived. Johnston also says it originated as a favor to IBM.

Is it inevitable that anything like a tax on earned income must become so complex that it virtually can’t be fixed, even when “everybody” agrees how it should be done?